Pizza Price Hike

April 19, 2004

For two solid weeks, Marty Schwartz's phone at Message On Hold has rung nearly non-stop—but not with a sudden surge of new customers. Instead his current customers—hundreds pizza operators among them—are calling to have the marketing messages on their call answering/sequencing machines changed post haste. Nearly all the requests are the same: Keep the message the same, but raise the prices.

"We typically change 200 to 300 messages a week, but I think we'll do three times that by the end of this week," said Schwartz, who runs MOH's production department in Wadley, Ala. "Right now they're coming out of the woodwork."

Record cheese prices are driving the rush to change, Schwartz said. One MOH customer who has 120 locations bumped prices up by a dollar on his advertised specials. Some are canceling cheese pizza specials, and others are developing new specials centered less on pizza and more on wings or breadsticks.

Given his druthers, they'd all be simple price changes, Schwartz said. "We're masters at surgery, so if the only thing they're changing is a price point, all we have to do is go in and say, 'All for only $20.99,' paste that in, remix it with music and download it to the stores."

Were the decision to raise pizza prices so simple, Mark Ulrey would be a lot happier. The vice president of marketing and purchasing for four-store, Columbus, Ohio-based Flyer's Pizza & Subs, Ulrey called the company's move to bump up prices "gut wrenching," but something he had to do. Not only have cheese prices milked his profits dry, but the cost of meats used in toppings are approaching record highs. Plus, rising gas costs forced him to increase delivery charges by 25 cents.

Ulrey called the confluence of multiple commodities price increases a "storm" that may only calm down over time rather than diminish completely. At present he sees no rainbows near or silver linings in the clouds hanging over his P&L.

"Sure, prices are going to go back down sometime, and you'll be able to enjoy some increased profits when they're lower," he said. "But they're never going to go back down to the numbers we've enjoyed in the past."

Pizza Hut spokeswoman Patty Sullivan agreed with Ulrey, saying the industry is headed into "uncharted territory" this year with the price of so many commodities rising in unison. It's not like the past, she said, when the price of cheese was the lone issue, or gas

What's Important

For the first time in many years, pizza operators are raising prices to counter record-high cheese prices.

Many who have already increased prices say their customers understand and aren't complaining.

The three largest chains, however, have decided to wait and see if the situation worsens before raising prices.

costs got out of hand.

So what's the world's largest pizza company doing about it? Sitting tight, Sullivan said.

"We are watching everything and having conversations on a regular basis to discuss those changes, but at this point, there have been no firm decisions to do anything," she said. "For now, we're going to tighten our belt and run the business as best we can."

The official line from Pizza Hut's nearest competitors, Domino's Pizza and Papa John's, is that pizza prices aren't going up at corporate-owned units, though franchisees of all three companies may choose to increase prices. According to MOH's Schwartz, most every large-chain franchise customer of his has raised prices, including Freddie Wehbe, a five-store Domino's franchisee in Gainesville, Fla.

"We added a dollar to all our coupons and offers, we added 78 cents to our student menu (an increase to $7.77 from $6.99), and we raised all our toppings prices," Wehbe said. "The base price of our pizzas, though, stayed the same."

Though Domino's operators in several large Florida markets recently added a $1 delivery charge, Wehbe hasn't followed suit yet since many of his customers are college students at the University of Florida. "We might add it on when they come back to school in the fall, but to do it now when school's about out, we thought that would confuse them."

"I was at the pizza show in Vegas when I heard cheese went up. So I called my supplier in a hurry," said Gold, who expects to do $4 million in sales this year. "I asked him what his price was (on fresh cheese), and he said $1.63. He said he had 10,000 pounds, and I told him I'd take all of it."

Gold found another supplier eager to unload several thousand pounds of frozen cheese at $1.43 a pound, which he bought (though he's never used frozen mozzarella). "I know I'll be OK for six to eight weeks, but I'll be screwed by July or June," he said, laughing.

Do customers really mind?

None of several operators interviewed by PizzaMarketplace said their customers complained when they increased their pizza prices. Ulrey said one customer who orders the same pizza weekly called back to ask if the higher price was a mistake when she received a recent order. But when he explained the higher-than-usual ticket was due to a price increase, he said she didn't quibble. "She basically said she was fine with it and that she was going to get our product regardless."

Jack Loggins, owner of Loven Oven South in Lowell, Ind., said he knows his regulars will understand as well. He increased prices in the second week of April.

"I expect they'll take notice, especially the ones who order the same thing every week," said Loggins. "But at the very least, the consumers themselves will have to understand what's going on with prices. They know you can't maintain increases and not pass them on."

Ed Zimmerman, president of Successfoods Marketing in Novato, Calif., believes pizza operators are unnecessarily afraid to ask for more money.

"I think they're overly sensitive to raising prices, and their customers are less sensitive than operators think they are," said Zimmerman, formerly an officer with West Coast pizzeria distributor Bellissimo Foods. "Consumers come to a pizza place because they like the product and because they find it convenient and consistent. So if a pizza is 25 cents or 50 cents more the next time—which is less than adding on a topping—it's not really relative to their decision making. They'll pay it."

Chuck Wilburn, a one-unit Shakey's operator in Redlands, Calif., raised his prices when he saw cheese prices soaring, and the majority of his customers didn't object, he said. Still, there always is a handful people who come looking for a bargain.

"It's happened where I rung up an order and said, 'That'll be $15,' and they say, 'I'll give you $12,'" Wilburn said. "Who goes in to Nordstrom and does that? Who buys their gas like that? Why, then, does somebody think they can do that with pizza?"

Wilburn supplied his own answer: "The industry's really done it to itself with all the discounting and couponing. We've done ourselves no favors. We need to stand behind our product and charge what it's worth."

And what it's worth at Domino's Pizza's corporate stores today, said spokesman Tim McIntyre, is what it was worth yesterday and the day before. The company has weathered many a cheese price spike, he said, and history shows the cycle will head downward eventually. Meantime, asking customers to chip in to pay for the imbalance, he said, won't happen.

"(G)iven the competitive nature of the industry, the answer is not to simply pass along price increases to customers; nor is the answer to skimp on product," McIntyre said in an e-mail. "Those are both short-term, anti-customer responses. We continue to look for ways to drive sales and manage the costs that are in our control until such time that cheese returns to a more 'normal' price range."

That strategy might work for Domino's corporate, said Loven Oven's Loggins, but not for his operation.

"I almost went bankrupt the last time this happened. Nobody else increased prices, so neither did I. And so I ate the losses for eight straight months," he said. "Then, when the prices went up 30 cents in one week (in March), I knew I had to do it. You can't run a viable business and take those kinds of hits on the cost side."

The magic number: $1.40 on the block

In his consulting business, Zimmerman represents several large cheese manufacturers, who don't like the price run-ups either. Not only do they typically get blamed for the cost increases, Zimmerman said rising prices do little to boost cheese makers' profits.

Pizza operators loved the record-low cheese prices of 18 months ago, he began, "But now with these prices, (cheese manufacturers') business practices are being called into question." What few operators understand, Zimmerman added, is that "cheese manufacturers tend to make the same amount per pound, whether prices are high or low. They typically sell at an average over block."

So is there some magic balancing point, a market price that's suitable for milk producers, cheese producers and pizza operators alike?

Zimmerman said yes: a block price of $1.40.

"That's the magic number where everybody along the whole chain can make money," said Zimmerman. "Once you start getting too far below that number or too far above it, it puts pressure on some point in the distribution channel. It was too low for the milk producers for too long, and now it's too high for the pizza operators."